Lion Brewery downgraded after taxes favour hard liquor

Fitch Ratings has downgraded the rating of Lion Brewery to 'A+(lka)' from 'AA-(lka)' Sri Lanka's largest beer maker on lower sales volumes triggered by recent tax hikes, which drove up hard liquor sales by 27 percent.

The outlook is negative.

Many consumers switched to small bottles of arrack after taxes on so-called 'strong beer' was hiked by the current administration.

Among top producers include Distilleries Corporation and W M Mendis, a firm connected to Sri Lanka's Perpetual group.

Lion's net leverage worsened to 6.3x during the financial year ended-March 2017 (FY17), from 1.9x at end-FY16, as the beer volume dropped by more than 50% due to successive tax increases and a six-month halt in domestic production due to floods in 2016, Fitch said.

The rating agency said beer industry volumes contracted from 2014 to 2016, as 'excise duties per unit of alcohol of strong beer surpassed that of hard liquor due to tax increases in 2015'.

A tax on beer cans was also introduced from November 2016, prompting consumers to switch to hard liquor, the rating agency said. Strong beer made up 75 percent of Lion Beer sales.